Lease Option Buyers: Bad Credit?

Question

I have a question regarding lease option buyers. One of the assumptions we make about lease option buyers is that they probably can't qualify for a bank loan. If that's the case, what are some of the screening techniques I can use to have a warmer and fuzzier feeling that they will pay me every month. Just because they can give me a large down payment doesn't mean they will pay me on time every month. Any thoughts?

Thanks,
Kelvin

Thanks,Kelvin

Kelvin Letron Brantley · Answer

Account Closed, thanks for the response.  You confirmed what I already suspected.  I guess that's why they call it investing.  There is definitely risk involved in many ways.

Kind Regards,Kelvin

Chuck Brickman · Answer

Wow. Bill you have to be careful when you paint with a broad stroke. No one strategy works in all situations. I find it best first to understand, know all the facts, then be understood.

Danielle, it worked out pretty well for me. I worked with a Real Estate Attorney to put together both the contract and note and his office handled the closing. The buyer made monthly payments for 13 months and then refinanced through a bank. I'd like to take credit for the strategy but honestly, it was a culmination of advice from some property investment clubs and pros familiar with the market here and have experience with the strategy and legal advice. Feel free to IM me if you need particulars.

Bill Gulley · Answer

An option contract by itself has no qualification matter to it, but I suggest you do look at the ability to perform simply because you're tying up your property at a set price.

If it is a commercial property you can finance the option price, then you would look at the ability to pay.

It it's residential, you cannot finance the option price if it is credited to the purchase price, this would be a financing agreement with the buyer and Dodd-Frank will apply unless it's truly a commercial transaction.

A lease that is made with an option, you should be qualifying the tenant as any other tenant. If any rents are credited to the purchase by a tenant-buyer, you have a financing agreement again, DF applies.

It isn't prudent for sellers to do their own finance underwriting, you have a vested interest in making the loan, if you are exempt from DF (and dealers, those in the business may not be exempt) you should still follow the DF guidelines because there are also predatory lending and dealing laws that you could be nailed with when selling to an unqualified buyer. See a professional finance type!

An example of a screw up in determining the ability to pay, just verify income for the last 3 months! You need the last 12 months. At least the last 12 months of rental verifications as well. If self employed, last 2 years tax returns with all schedules.

And, while you may be exempt from the DF Act, your seller financed note will be worthless without a NMLS number affixed to the note and deed because any note buyer won't know how many notes you did in the past for your exemption from compliance. You're better off complying even if you aren't required to.

Old saying; he who represents themselves in court has a fool for a client.......okay, anyone who originates their own seller financed note has a fool for a lender. The trick is to avoid lender liabilities, predatory dealing and lending activities, DIY and you assume all the risks. So, if you don't have mortgage underwriting experience, seek out someone who has. Good luck :)

Danielle Levins · Answer

@Chuck Brickman Did you eventually do the deal. What was the outcome of this situation???

Chuck Brickman · Answer

I struggled with the issue recently when I sold my first owner finance property.  The purchaser's credit scores were lower than I'm comfortable with. After reviewing his credit report  I also asked for proof of income for the last three months. After scrutinizing his credit report most of his issues were from the past. I called former landlords as well.  It's risky and you just try to do due diligence...coupled with a tight contract.